Lecture 5:

Elasticity
- Price Elasticity of Demand
- Cross Elasticity of Demand
- Income Elasticity of Demand
- Supply Elasticity of Demand
Ref:
1. Economics (8e), Roger A. Arnold

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 Price Elasticity of Demand
-A measure of the responsiveness of quantity
demanded to changes in price

Ed = Elasticity coefficient
Qd = Quantity Demand
% = Percentage
∆ = Stands for change in

* Elasticity Coefficient (Ed) of Price Elasticity of Demand is a absolute value

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Price Elasticity of Demand

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Price Elasticity of Demand

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 Elasticities,
Price
Changes, and
Total
Revenue

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 Determinants of Price Elasticity on
Demand
1. Number of Substitutes:
The more substitutes for a good, the higher the price elasticity of
demand; the fewer substitutes for a good, the lower the price
elasticity of demand.

2. Necessities Versus Luxuries:

The more that a good is considered a luxury (a good that we can
do without) rather than a necessity (a good that we can’t do
without), the higher the price elasticity of demand.

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 Determinants of Price Elasticity on
Demand
Percentage of One’s Budget Spent on the Good:
The greater the percentage of one’s budget that goes to
purchase a good, the higher the price elasticity of demand;
the smaller the percentage of one’s budget that goes to
purchase a good, the lower the elasticity of demand.

Time:
The more time that passes, the higher the price elasticity of
demand for the good; the less time that passes, the lower
the price elasticity of demand for the good.

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 Cross Elasticity of Demand
-Measures the responsiveness in quantity
demanded of one good to changes in the price o
another good.

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 Income Elasticity of Demand
-Measures the responsiveness of quantity
demanded to changes in income.

Ey > 0 Normal good

Ey < 0 Inferior good

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 Price Elasticity of Supply
- Measures the responsiveness of quantity
supplied to changes in price.

Coefficient Responsiveness Terminology

Es > 1 ∆ % Qd > % ∆ P Elastic
Es < 1 ∆ % Qd < % ∆ P Inelastic
Es = 1 ∆ % Qd = % ∆ P Unit Elastic
Es = ∞ Extreme ∆% Q d , as Small % ∆ P Perfectly Elastic
Es = 0 No ∆% Q d , as % ∆ P Perfectly Inelastic

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Price Elasticity of Supply

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